Missiles ignite oil-price spiral

By -
The Washington Times -
Wednesday, July 5, 2006

Oil prices reached a record $75.40 a barrel in New York trading yesterday in response to rising tensions with North Korea, and some traders predicted that crude will hit $80 before the end of the year.

The sharply higher crude costs put pressure on pump prices in the thick of the U.S. summer-vacation season, with surveys showing that high fuel prices are not prompting Americans to cut back on driving or cross-country travel.

The unrelenting demand for oil in the U.S. and Asia and the nuclear standoff with Iran forced up oil prices even before North Korea pushed them into record territory by test-firing missiles during the U.S. Independence Day holiday.

Thomas Bentz, a BNP Paribas Commodity Futures broker, said the “fireworks” over North Korea, which is not a major producer or consumer of oil, shows how sensitive oil prices are in a tensely divided world. “The market just always seems to react to any political unrest.”

Analysts expect pump prices to rise quickly in the coming days, tracking the sharp run-up in oil prices since June 20. After breaking through the previous record of $75.35 around noon yesterday, contracts for delivery of premium crude in August settled at $75.19 on the New York Mercantile Exchange, a $5 jump in the past two weeks.

Nationwide, the average price of regular gas spiked to $2.94 a gallon yesterday from $2.89 a week ago, according to GasBuddy.com. In the Washington area, where gas prices are higher because most fuel is delivered by pipeline from distant Gulf Coast states, gas cost $3.04 on average, up from $3 last week.

T. Boone Pickens, a longtime oilman and operator of an influential energy hedge fund, yesterday told CNBC that persistent geopolitical tensions and strong demand have put oil prices on track to reach $80 a barrel by the end of the year.

Other analysts expect oil prices to stay in the mid-$70 range, or decline modestly to the $60 range if tensions with Iran ease and U.S. economic growth slows substantially.

U.S. consumers have grumbled about high prices but have not stopped gulping gas at prodigious rates, although they are showing a preference for smaller, more efficient vehicles when they shop for cars.

“In the short term, you are stuck,” said Jason Schenker, economist at Wachovia Corp. People must use their cars to get to work, and they cannot immediately buy new cars or change jobs to shorten their commutes or reduce their fuel expenses, he said.

Over the long term, consumers will make fuel-saving adjustments. In the meantime, they have opted to keep spending on gas while cutting back on more discretionary purchases, such as restaurant meals, entertainment and clothing, he said.

“Consumers refuse, with somewhat justifiable imprudence, not to forgo their summer vacations over the matter of 50 cents a gallon,” Mr. Schenker said.

However, more consumers are trying to unload the millions of large sport utility vehicles (SUV) they purchased in recent years, according to Cars.com, a Web site that reports that postings of large SUVs for sale have increased 14 percent since March. That was when gas prices spiked toward $3 a gallon after a winter lull.

But Mr. Schenker said Americans still prefer SUVs over cars. They simply are going for more fuel-efficient models.

“Cars have yet to retake the majority of light-vehicle sales in any month since 2001,” he said.